Spectra Systems (LON:SPSC) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Spectra Systems (LON:SPSC) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Spectra Systems:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = US$5.3m ÷ (US$33m - US$3.2m) (Based on the trailing twelve months to December 2020).

So, Spectra Systems has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Electronic industry.

Check out our latest analysis for Spectra Systems

In the above chart we have measured Spectra Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Spectra Systems.

What Can We Tell From Spectra Systems' ROCE Trend?

Spectra Systems has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 18% on its capital. Not only that, but the company is utilizing 33% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Spectra Systems' ROCE

Long story short, we're delighted to see that Spectra Systems' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 912% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for Spectra Systems that we think you should be aware of.

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